In a recent tv interview (click here) Jamie Galbraith was asked to list the questions that he would have put to Ben Bernanke (were he able to monopolise the Fed Chairman’s press conference). Galbraith made a large number of interesting points (frased in the form of questions), including (a) a brilliant criticism of S&R’s recent ‘negative outlook’ on US Treasury bills (US bonds, that is) and (b) a non-monetarist (i.e. non-loony) critique of Quantitative Easing. But what struck me as of huge significance was the short but crucial reference to the globa; importance of the banking crisis in Europe (see here and here for my preoccupation with this silent crisis).

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Why is his criticism of S&P brilliant? The rating agencies are a joke, but not because they are downgrading sovereign debt. The fact that the US can print the money to monetize it’s debt does not ensure a AAA credit rating. Defaulting through inflation is the same thing as giving your bondholder’s the analogous haircut through a structured default. What on earth is the difference?

This is not the first time that Galbraith has made this ABSURD statement. He did the same thing on CNBC exactly one year ago while debating Peter Schiff, where he claimed that the lower interest payments on the debt today compared to 10 years ago signified that the national debt was in NO WAY a problem.

Also, I’m tired of hearing all these people debate what the Federal Reserve should or should not do. Anyone who has knows the history of the federal reserve, who has studied the work of its founders and read transcripts of their speeches and bodies of their work on the subject understand fully that the central bank model is nothing other than a public private partnership between the money trust and the government. It is a cartel with a national charter and monopoly rights over legal tender.

I’m not a “market fundamentalist.” I’m progressive where it counts and I recognize the need for nuance. However, in the case of interest rates and money, the market always knows better what the interest rate should be than any central bank. Central banks in control of interest rates always destroy a nation’s currency and work like sugar to feed the cancer of malinvestment in the economic body.

And the solution is not what Friedman and other monetarists have proposed, which would be to automate increases in the adjusted monetary base or some other monetary aggregate so as to guard our purchasing power from clutches of sycophants in congress or at the Fed looking to ingratiate themselves with big banks. This whole argument is absurd, and so is the idea that we need a flexible or elastic currency in order to prevent contractions in economic activity that would otherwise benefit the economy. Credit will stretch as far as it has to in a free market without disproportionately expanding risk-taking. You can’t expand money and credit without expanding risk, and there is always a price to pay for excessive risk taking.

You need to take risks in order to succeed, but the risks that people take in today’s financial markets are risks that no sane human being would ever take if it were not for the fact that money can be created out of thin air by central banks and used in carry trades for yield arbitrage.

The amount of malinvestment and perversion in credit markets is worse today than it was prior to the crisis, and instead of focusing on small potatoes, economists should be talking about the bigger picture, which is that the rules which apply to private individuals, must also apply to governments. You cannot run a national debt that is larger than anything you will ever be able to pay back.

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